I've been fortunate enough to have had a career spanning a significant number of years in operations within manufacturing and distribution, initially in the motor industry and then fast-moving consumer goods (FMCG), with roles covering most aspects of the product supply chain. Thanks to my exposure to ERP solutions for over 20 years, I’ve long been a strong advocate of maximising a solution as far as possible to drive real operational improvements.
Moving to a more solution-based approach through ERP can help address that risk and drives process standardisation and sharing of information which can be a significant step for many companies. The challenge is whether Lean and ERP can complement each other.
In this blog, I’ll be digging into this topic. Read on to learn my verdict…
How do businesses operate?
From my experiences, many businesses run successfully on the knowledge contained within the heads of key employees who almost become ‘gurus’ on how to operate based on the knowledge and experience they have acquired. As a result, they can almost sense when something is about to happen and act accordingly.
This carries significant risk if those people leave or aren’t available. It certainly isn’t sustainable to deal with rapidly changing business landscapes and desire to grow.
At the same time, many of the concepts of Lean are embedded within the operations function of businesses. The aim is to drive out waste and make continuous improvements to reduce costs, increase efficiencies and often enhance delivery success.
Financial benefits are often the driver to adopting a leaner culture, but increasing focus on continuous improvement is also about not ‘standing still’ and working proactively to stay ahead of the competition.
The relationship between Lean and ERP
One of the biggest ‘blockers’ to implementing ERP solutions is to assume implementing a solution, such as ERP, will counter any work done on streamlining processes and reducing waste.
I’ve often read that ERP and Lean are polar opposites of each other as Lean is very much focused on a pull process whereas ERP is very much a push process. The result of this is that the push process can drive up inventory costs, overproduction, and potentially defects which are three of the seven wastes that are always identified in Lean thinking.
However, my own experiences of using ERP have addressed some of the other wastes in terms of waiting/delays which impact time, over-processing through excessive manual intervention, transportation (particularly when it comes to information) and movement with people having to engage with others to get approval or relevant information.
In the pure manufacturing process, Taiichi Ohno (the father of Lean manufacturing) argued moving to more of a ‘pull’ approach is beneficial, but doing that involves consideration of various factors including:
- The business model (Make to Order/Make to Stock/Forecast)
- How much that can be decoupled from demand based on variability
- Capacity within the supply chain to respond to demand changes
However, although there are benefits directly within manufacturing, many of the support areas using solutions such as ERP can help drive additional significant process improvements through using the system rather than relying on manual or offline approaches.
My view is that Lean and ERP can support each other successfully if applied correctly and are certainly not polar opposites. Both can help drive improvements and drive out waste if used effectively. It’s not a case of ‘one size fits all’ and finding the right approach to fit the right circumstances is the way to success.
My background in business was very much FMCG where supply chain volatility and the need for fast effective service were critical to success. This was very much a ‘make to demand’ profile, given the lead time to supply was very short, to enable customers to maximise their sales revenue to the end consumer.
The approaches taken were very much focused on maintaining service whilst at the same time reducing inventory. But anything that impacted service was most critical since this was a key selling point.
Given the initial question was how ERP can complement Lean, I’ll share some practical examples of how that was achieved.
With a relatively large number of Stock Keeping Units (SKU), the original process was very much based on the knowledge of the Master Planner. They interrogated demand and planned the monthly/weekly build based on knowledge and experience as to what might happen.
The production planners then executed the plan through the relevant production areas, and the production areas called out components to the shop floor to meet that monthly/weekly plan.
Through the application of ERP, the planning approach moved to a weekly/daily plan, with picklists being created every 24 hours to match only what was planned for the day, effectively ‘pulling’ components before being consumed (almost an electronic Kanban). This had a significant impact on stock held on the shop floor.
In addition, through further analysis, products could be segmented into A, B, and C categories based on size, value, key Customer SKU, configurability and other factors so that planning parameters could then be set accordingly.
This enabled planners to take more responsibility for planning their product ranges and enabled the system to generate build suggestions based on agreed parameters which had been refined, rather than doing everything manually.
Consequently, the planning cycle was reduced to weekly with a horizon of the following week only and the plan created within a day. This improved service since the plan was more flexible given the shorter horizon. It also minimised inventory since any plans could be adjusted on a weekly basis and stocking policies reduced to weeks rather than months particularly for high value, larger size products.
This approach enabled metrics to be introduced to assess conformance to plan. Although initial figures were 60%, within a very short period of time, the figures improved to the point where 90%+ conformance is the norm.
Clearly, this is still a ‘push’ approach but the nature of the demand profile and capacity meant that a full ‘pull’ system couldn’t work. However, by leveraging parameters within ERP and applying intelligence, this boosted customer service quality whilst simultaneously reducing stock.
The net result? A supply chain much closer to true demand with a shorter window so it’s a step closer to a ‘pull’ methodology.
The original approach for material scheduling relied on the creation of scheduling spreadsheets based on inputs from the legacy system together with the knowledge of the scheduler themselves, which were then sent out to suppliers for them to confirm.
Given the time taken to create these, materials had to be scheduled out further in advance to ensure continuity of supply. This often resulted in a ‘just in case’ approach to ensure material shortages did not adversely affect production.
The changes in production planning meant there was potential to shorten the material scheduling horizon and so impact component supply chain success and inventory. Based on the timing of running the material requirements update, schedules could be created and emailed directly from the ERP solution based on applying the right parameters including Minimum Order Quantities (MOQs), and also delivery timetables.
In addition, by amending the window for scheduling, the system could then schedule what was required to match only what had been entered as a production plan rather than forecast. The net result of this was a weekly cycle with materials only being delivered to meet the following week’s plan, and supply confirmation within 48 hours of the plan being set.
This was a key factor in both the reduction of inventory and plan conformance.
On top of this and through analysis and categorisation of components, there were a large number of lower value, lower cube components that could impact build. Although these were currently scheduled, based on the categorisation, many of these were transferred to a supplier Kanban model where the supplier replenished based on agreed Kanban levels on a regular basis rather than scheduling.
This enabled schedulers to spend more time managing the higher value components, knowing the lower value items were self-managed. Again, this impacted overall inventory levels without impacting service. ERP still managed the transactions and gave the certainty through visibility of the stock, but didn’t trigger replenishment.
The size of the Kanbans also went through further refinement and were adjusted based on the annual cycle of demand and so were lowered out of season.
Within the FMCG environment, there were often changes made to products, often in the form of packaging updates or sourcing material improvements. Managing these historically had been challenging with a key dependency on communication and the planner/scheduler remembering not to re-order or build.
Given the fast-moving environment, it often meant this wasn’t managed closely enough, resulting in write-offs into six figures.
Using status codes within the ERP solution, which could then control activities such as purchasing, planning and selling, enabled more centralised control and removed the reliance on verbal communication. This helped control phase out and phase in of any new products or components.
This had a significant impact on obsolescence waste and enabled the linking of a single customer barcode to an alternative product by date, which also ensured that service was not impacted.
Summary: So, can Lean and ERP really get along?
Clearly, the approaches identified here don’t represent a full move to a ‘pull’ process, although ERP can support this. It does represent some significant steps to address some of the waste areas we associate with Lean.
The scale to which you can move towards a ‘pull’ process depends on several factors around the type of business model you have, the lead time to customer and capacity to respond, and also the predictability of the supply chain.
However, if you’re in a ‘make to stock’ business, being able to leverage the capabilities of a suitable ERP solution, you can significantly improve planning cycle times and effort required. You can also significantly reduce inventory, both of which can have a big impact on many of the seven wastes.
So, going back to my original question: can ERP compliment Lean? The answer is most definitely YES when it is applied effectively.
Is your food business prepared for the unpredictable?
Times have never been so uncertain for the food and drink industry. With the end of the Brexit transition period approaching, Christmas on the way, the ever-increasing threat of climate change and the UK still amidst coronavirus restrictions, there's a potential storm brewing for manufacturers.
Supply chains are under more pressure than ever so it’s critically important to ensure your business is in the best shape possible to navigate these challenges. But what does that even look like?
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